Mergers a wake-up call to UAE exchanges

Dubai, February 20, 2011

A wave of mega-mergers between the world's major stock exchanges might persuade policymakers in the United Arab Emirates to push ahead with consolidation of the UAE's fragmented bourses, where volumes have slumped since the financial crisis.

The UAE's exchanges are fighting each other to attract liquidity from foreign investors that have yet to return in meaningful numbers since the crisis.

A potential merger of the two main bourses would boost volumes and remove inefficiencies associated with trading in the UAE markets.

Talks on a potential merger between the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) have been ongoing since last year. But local politics has got in the way of any tie up.

'The regulators have to overcome the inertia associated with the merger. It is a question of someone losing control and someone gaining control and it is very political,' said one Abu Dhabi based investor who declined to be name due to the sensitivity of the matter.

Deutsch Boerse's plans to take over NYSE Euronext and talks on a string of other exchange deals show how fierce competition has forced these firms to tackle political and regulatory hurdles that hampered mergers in the past.

Consolidation could help bring foreign investors back to the region. It would also boost the chances of the UAE being upgraded to an emerging market by MSCI, which provides stock market indexes used widely by fund managers to benchmark investment performance.

The UAE is currently classed as a frontier market by MSCI -- a higher risk classification. In 2009 and 2010, when other emerging markets saw huge inflows the UAE lost out from not being in the MSCI emerging market indexes.

Exchange officials and regulators have been vocal on the benefits of a merger but investors have begun to doubt the seriousness of the discussions.

'Within the (United Arab) Emirates, there's not a unified sense of priority to having a single exchange. There are numerous talks about consolidating exchanges. However, at this point, they are only discussions,' Eric Swats, head of asset management at Rasmala Investments.

Borse Dubai, which has controlling stakes in DFM and Nasdaq Dubai, in 2007 paid $4 billion for stakes in Nasdaq OMX and the London Stock Exchange, part of plans to make Dubai a financial hub that have suffered since the crisis.

'From an investment point, they have picked up stakes in the big bourses but on a local level, they don't seem to have done anything concrete,' said Naqvi.

Discussions with different stakeholders, including foreign institutions, brokers and other investors about the viability of a deal are still going on.

Abdullah Al Turaifi, chief executive of UAE regulator Securities & Commodities Authority (SCA), said it would support any moves the bourses decide was in their interest.

'They have had meetings together (the Dubai and Abu Dhabi stock exchanges) as per their strategy,' he told reporters at a conference in Abu Dhabi on last week.

'If it is good for them, then we will support it. We are waiting for the result of their meetings.'

Goldman Sachs has already done a study on a possible merger of the United Arab Emirates' two main bourses. 'Merger of exchanges is one of the most difficult historically and cross-border exchange mergers always create obstacles,' said Kamran Butt, head of Middle East equity research at Credit Suisse in Dubai. - Reuters